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Financial advisors often prepare for their clients an investment policy statement, which outlines your goals, risk tolerance, time horizon and asset allocation. It may also list specific securities or sectors you want to avoid. Even if you don’t have an advisor, it’s a good idea to draw up this kind of statement and share it with all parties involved in your investments.

What Is an Investment Policy Statement?

An investment policy statement is a document that financial advisors use to make policy decisions for your specific portfolio based on your goals. It highlights your needs and desires related to your investments, allowing financial advisors to manage your investments in a way that best meets those goals.

This document is written by a financial advisor and you, the client. It includes your investment goals and how your financial advisor will help you meet those goals. It’ll also include your risk tolerance and current asset allocation. It’s also the document that’s shared with anyone involved in your investments, like managers or other professional advisors.

You’ll want to detail how you want your money to work for you, while your advisor will guide you in achieving those objectives.

What’s in an Investment Policy Statement?

An investment policy statement details your expectations and objectives of your investments. It will go over the structure of how your portfolio is made based on your investment style along with how it will be monitored. While not every investment policy statement is the same, they do have a few things you can expect to find in most of them. Expect variations based on your portfolio. A typical one includes:

  • An executive summary: Your personal details, like your age, the type of portfolio you have, current assets and return rate. Aside from goals, this section might also include your worst-case scenario and what you’re willing to lose.
  • Details about the investment committee: This is the firm or group of people who will oversee your portfolio and investments, so this section describes what they are responsible for. It will go over how the committee handles your investments based on your goals and objectives. It might also include information about rebalancing where necessary.
  • Portfolio investment policies and guidelines: This section goes over asset allocation and how your funds will be managed. The younger you are, the more risk you’re expected to take. But it depends on the type of investor you are and when you plan to cash out on your investments, also known as your time horizon. These details should also be included.
  • Diversification policy: Based on your age, expected retirement age and risk tolerance, this section will go over how to minimize risk and low returns. Usually, the more your diversity your portfolio has, the less you stand to lose.
  • Rebalancing: Since your goals and objectives can change, this section includes how often the document is reviewed and updated. For instance, annually or quarterly. Most of the time, making changes doesn’t need to happen more often than once a year.
  • Portfolio monitoring: All portfolios are put up against a benchmark to see how they’re doing compared to industry standards. If a portfolio drops below a benchmark, updates and rebalancing will happen during the annual review or as necessary.

The statement should also include any compliance details, like fiduciary responsibilities and due diligence. It should be as detailed as necessary for you to understand how your financial advisor is working for you and what you both need to do to meet your investment goals. Even though it might be something your financial advisor (or team) puts together, this statement should be tailored specifically for you.

Do You Need an Investment Policy Statement?

Not every portfolio or investor is the same. The goals you want to hit might not be the same goals others want to hit. Having an individual, personalized plan that outlines your goals and plans is an important step in your investment journey.

It also depends on the type of investments you have. Typically, the more wealth you have, the more you’ll need help managing it. If you have a robo-advisor, there’s a chance you’ll have details about your asset allocation and rebalancing, but not necessarily something that’s specific to your individual portfolio and investments.

Bottom Line

If you’re working with a financial advisor or firm to handle your investments, you may want to get an investment policy statement. The more details you know about your investments, the better direction you’ll have in order to hit your desired goals.

If you aren’t working with an investment advisor, you might not have an investment policy statement. But knowing how your money is working for you, along with who is handling your money and helping make it grow, is an important part of your investment journey. This means having an investment policy statement is necessary.

Tips for Investing

  • Consider talking to a financial advisor about an investment policy statement. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • Diversify your portfolio based on factors like your age and when you plan to retire. Make sure your asset allocation is spread across many different securities so that if something were to happen to one of them, you wouldn’t see a significant drop in your portfolio’s worth. Proper and healthy portfolio diversification is a major key to making sure your investments are working hard for you.

Photo credit: ©iStock.com/Yumi mini, ©iStock.com/atakan, ©iStock.com/

Dori Zinn Dori Zinn has been covering personal finance for nearly a decade. Her writing has appeared in Wirecutter, Quartz, Bankrate, Credit Karma, Huffington Post and other publications. She previously worked as a staff writer at Student Loan Hero. Zinn is a past president of the Florida chapter of the Society of Professional Journalists and won the national organization's "Chapter of the Year" award two years in a row while she was head of the chapter. She graduated with a bachelor's degree from Florida Atlantic University and currently lives in South Florida.
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